Message from MoneyGram

If you’re searching for a teachable moment from the financial sector, consider MoneyGram International. The St. Louis Park–based electronic money transfer and money order business ran into some turbulence last fall. The troubles metastasized to the point where its very existence seemed in jeopardy. This didn’t have to happen.

MoneyGram wasn’t being outfoxed by foreign competition. It was growing steadily by revenue, earnings, and other measures. It was building its success largely on a money transfer business that immigrants the world over depend upon. The company is the runner-up in the money transfer market, with a 4 percent share. Western Union is far ahead with 18 percent, the number three player has 1 percent.

So what did happen? MoneyGram dipped into the subprime mortgage market, seeking higher yields by sinking a significant amount of its investment portfolio into asset-backed securities untested by a downturn in the housing market. The trouble worsened to the point where, in March, it concluded that the way out was to sell a controlling interest in the company to a group led by Goldman Sachs and private-equity firm Thomas H. Lee.

That sale, which amounts to a bailout, should save the company. The management argues that its business model stood up throughout the crisis. The trouble was that its capital structure was in urgent need of repair. The necessary fix has arrived by way of the recapitalization engineered as part of the Lee- Goldman deal.

But the deal has left many shareholders angry—and critical of the pay packages for MoneyGram’s top officers. Some of the largest shareholders, including Blum Capital Partners in San Francisco, have said MoneyGram should have given more serious consideration to a December offer from rival Euronet Worldwide to buy the company in a stock deal for $20 a share.

That would have been a good deal for investors, at least in retrospect. In February, MoneyGram’s stock topped the Motley Fool investment Web site’s list of “worst stocks in the world.” Trading at $3.70 then, it fell to less than half that price in May. It was around $30 last July.

Stockholders Irate

In a lawsuit filed in Hennepin County District Court in April, MoneyGram stockholder L. A. Murphy called the sale to Lee and Goldman a “management cram-down” that has vastly diluted the value of her holdings. Another lawsuit, from the Ann Arbor Employees’ Retirement System, alleges that the company lacked the controls needed to prevent its investment losses and initially concealed the extent of the losses.

In late March, MoneyGram disclosed that the U.S. Securities and Exchange Commission has initiated an inquiry into the company’s financial statements, its reporting and disclosures related to its investment portfolio, and its negotiations to sell the company.